Prospect Theory and IPO Returns in China

32 Pages Posted: 15 Aug 2017

See all articles by Zhiqiang Wang

Zhiqiang Wang

Xiamen University

Bingbai Su

Xiamen University - School of Management

Jerry Coakley

University of Essex - Essex Business School

Zhe Shen

Xiamen University

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2017

Abstract

Chinese IPOs offer investors two potential lottery-like gains. One is huge first day returns as Chinese issuers leave more money on the table than other issuers and the other is that a particular IPO may go on to become the next Alibaba in the long run. Using a sample of 862 book-built Chinese IPOs 2006-2012,this paper finds a significantly positive relationship between expected skewness and two direct measures of retail investor demand. It also establishes a positive relationship between expected skewness and first-day returns that are mainly driven by the sentiment of retail investors. A one-standard-deviation increase in expected skewness of an IPO stock leads to an increase of 4.7-9.3 percentage points in the first-day return. It also finds robust evidence of a negative relationship between expected skewness and long-term abnormal returns as retail investors sell. A one-standard-deviation increase in expected skewness predicts a decrease of 22-33 percentage points in the 36-month post-IPO abnormal return.Taken together, these findings suggest that skewness preference exerts asignificant influence on post-IPO returns through retail demand in China.

Keywords: Skewness, IPO, Retail Demand,First-day Return, Long-term Performance

JEL Classification: G32

Suggested Citation

Wang, Zhiqiang and Su, Bingbai and Coakley, Jerry and Shen, Zhe, Prospect Theory and IPO Returns in China (April 2, 2017). Available at SSRN: https://ssrn.com/abstract=3018205 or http://dx.doi.org/10.2139/ssrn.3018205

Zhiqiang Wang (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

Bingbai Su

Xiamen University - School of Management ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
China

Jerry Coakley

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

Zhe Shen

Xiamen University ( email )

School of Management
422 Siming South Road
Xiamen, Fujian 361005
China

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